Monday, November 24, 2008

Question: Who stands to benefit most from the proposed automaker bailout? Answer: Big Labor, the very group whose campaigns did most to suffocate the domestic automobile industry.

With this in mind, the answer to the current crisis is restructuring through bankruptcy, not a wasteful bailout. While bankruptcy would allow reworking of unsustainable labor contracts and legacy costs, a bailout would merely exacerbate the problem and kick the can down the road.

Current discussion regarding a potential bailout generally ignores the restructuring option, and presents a false dilemma. Namely, either temporarily prop up the Big Three by throwing more good bailout money after bad, or instead allow it to simply die.

That false dichotomy not only ignores the third option of rehabilitation via bankruptcy, it also ignores the fact that Big Labor would benefit most from a bailout, not the industry or its hardworking employees.

After all, as noted by the Alliance for Worker Freedom, “this is not a problem with the auto industry; this is a problem with the unionized auto industry.” That truism is demonstrated by the fact that domestic automakers carrying oppressive labor obligations decay, while automakers like Toyota, BMW and Honda, with more reasonable labor agreements, thrive.

Ignoring that simple truth, advocates of a bailout argue that the Detroit manufacturers are “too big to fail” (where have we heard that before?), and too intrinsically valuable to American culture. According to them, any refusal to pump even more taxpayer dollars into these broken enterprises will suddenly propel General Motors, Ford and Chrysler to extinction, along with their derivative parts industries, millions of jobs, auto financiers, car dealerships and other satellite businesses.

Naturally, auto executives and labor leaders echo these false claims, and have sauntered up to the federal trough to demand their share of the sudden bailout wellspring. Never mind, of course, that Congress just last month authorized $25 billion in federally-guaranteed loans, and that the underlying causes of today’s difficulties have been recklessly ignored for years.

Indeed, for decades.

That is precisely why a bailout would only facilitate and perpetuate the self-destructive decisions of domestic automakers and Big Labor, and why a structured reorganization under federal bankruptcy laws is the optimal course.

Although most Americans probably don’t realize it, our federal bankruptcy system was established by the Founding Fathers at the time they drafted our Constitution. They recognized that a functioning bankruptcy system was not only the fairest way of adjudicating insolvency, but also a critical element of a functioning economy. Accordingly, they established a bankruptcy structure to provide debtors a second chance, and to protect good-faith creditors who conducted business with companies or individuals unable to fully satisfy outstanding debts.

Granted, filing under Chapter 7 of our bankruptcy code does terminate a business, and liquidate its remaining assets to pay its creditors’ claims to the greatest degree possible. Chapter 11, however, allows potentially-viable businesses to avoid termination, and instead reorganize, rehabilitate and begin a course toward revival.

In the case of the Detroit automakers, Chapter 11 is clearly a viable option. After all, we know that automakers can succeed if they behave in rational ways. As noted above, automobile manufacturers like Honda and Toyota, which didn’t engage in the short-sighted labor agreements that are killing the Detroit automakers, have demonstrated their long-term profitability.

Although the unsustainable union contracts between Big Labor and Detroit automakers succeeded in purchasing temporary labor peace, they reflected the old adage “penny-wise but pound foolish.” And now we’re witnessing the consequences in vivid detail.

For example, American automakers agreed to such things as the United Auto Workers’ (UAW) “Job Bank,” which literally continues paying wages and benefits to idle workers lounging in auditoriums. The automakers also agreed to such extravagant fringe benefits, job guarantees and retirement privileges that it now costs them over $2,000 more to produce each car than their competitors. In fact, the domestic automakers’ legacy costs are so burdensome that while General Motors employs 250,000, it supports over 300,000 retirees and their spouses.

As a result, the Big Three’s share of the American market has plummeted below 50% for the first time, and it costs them $30 per hour more on labor than their competitors, despite the fact that the straight wages are similar.

By filing under Chapter 11, automakers could renegotiate those unsustainable labor contracts, create more workable pension and healthcare benefits and restructure manufacturing operations. In contrast, a taxpayer bailout would only provide reckless executives and Big Labor a “get out of jail free” card, and postpone the inevitable.

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Entrepreneur, former Fortune 500 senior executive, semi-retired at the age of 39 after founding and growing several businesses in High Technology, Management Consulting and Manufacturing.
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